Should I sell? Las Vegas market

Question

Bought the house in 2012. Remaining balance is 250k on a 3.25% FHA loan, eligible for pmi cancellation in 2 years . Mortgage is $1670/mo including pmi. In two years, mortgage may lower to around $1300 after pmi cancellation and some equity. Potential rent is $1900-2000. Market value is 390k. Tax exempt if I sell now or in the next couple years. This house is in a desirable neighborhood and previously sold in 2006 for $700k. Should I sell now and use the equity to add another smaller rental property? Or rent out and see where the market goes? If I sell, it will also improve my DTI ratio and increase my borrowing capacity. If I rent it out, there could still be room for equity in the Las Vegas market, although it could be argued that it is speculating. What would you do if you were in my shoes? Thanks in advance.

Oliver Martin · Answer

@Zach Evanish Thanks so much for your replies. Once of the reasons I posted this question is because I know there is no obvious right or wrong answer to this one. I agree with everyone that it is all based on your risk tolerance, your confidence in your local market, your personal situation and strategy etc. I do not have a definite decision yet as what to to on this property but I am already working on the next step in my investing game. I am in the process of getting a pre-approval for my next purchase which will be a larger home than I currently own. It will be a 5% down, primary, conventional loan. After I close that one, I will list this property and test the market for about a month or two before deciding what to do. Should I sell the property, I would use the profit to buy auction property/properties or any good deal from a motivated seller.My strategy is to accumulate a mix of free and clear properties; and properties with loan with the purpose of selling some someday to pay off the rest. Thus it is very important to buy only properties that I think will appreciate or is under market value. As long as I am cash flowing it probably isn't a very bad idea to bank on potential appreciation. But who knows, I might get an offer I can't resist when I test the market. :)

Zach Evanish · Answer

Depending on your appetite for risk and your confidence in the local and national real estate markets I would re-finance this house into a loan where you don't have PMI, rent it out and then use whatever extra cash you have to buy another rental in a different market than Vegas.

Will Stewart · Answer

'@Oliver Martin always good to have multiple options on every property you own, along with a good margin of safety. Best of luck sounds like you're off to a great start

Charlie Fitzgerald · Answer

I think looking at the overall return for my invested dollars over the period of time I intend to hold is a better approach (for me) than focusing on just one area (cash flow). I've bought properties that had less cash flow than I would have liked because the appreciation over the hold period I had in mind made up for it. Will, yes, I would. Because that rent would cover my cost of acquisition and nearly all of my annual costs and at 5% a year appreciation is giving me another 1625 a month in additional equity growth...as well as depreciation, as well as expanded portfolio.So it's really what makes the most sense at the time for the investor relative to their strategy and goals.Good post!

Will Stewart · Answer

would you buy a 390k house right now in that location if you would only get 2000 a month rent? Likely not. I'd sell especially since it's tax free money.

Christopher Brainard · Answer

@Charlie FitzgeraldI'm not necessarily suggesting that he invest out of state, but the property he currently owns is not cash flowing and there are far better investments, even inside the Las Vegas area. Even if he refinances to do away with the PMI, he still needs to account for Vacancy, CapEx, Maintenance, Taxes, Insurance, and his Mortgage. A basic goal as an investor should always be to improve your investment portfolio, not stick with the devil you know. While I can't speak for other investors on the website, I'm in this for the money and nobody ever went broke taking profits - 140k tax free is a reasonable payday. Of course, @Oliver Martin needs to decide what is best for his situation and I seem to be in the minority, suggesting that he sells.-Christopher

Charlie Fitzgerald · Answer

I've been in Las Vegas 22 years and I have a bias, admittedly. I also believe the devil you know is better than the one you have not met yet. I'd stick with Vegas. It's proven itself over and over as a great market for long term ownership in all categories.

Christopher Brainard · Answer

@Oliver MartinI would sell the property, while you're still in the tax exemption period for owner occupancy. Property values in Las Vegas has significantly rebounded since the crash and I doubt you're going to continue to see 30%+ appreciation in the coming years - I'm expecting a more modest 5%. You would need an appreciation rate which will outpace your tax exclusion in order to make more money from holding it, which I think is doubtful. Additionally, that same equity could be used to purchase rental properties which would have a much better Gross Rent Multiplier than what you currently have.-Christopher